TWO years after Selangor’s water restructuring that involved a problematic takeover of privatised assets and concessionaires, a similar situation could be developing in Johor.

Water supply services in the southern state are managed by Ranhill Holdings Bhd’s subsidiary SAJ Ranhill Sdn Bhd, but recent statements by a state assemblyman have raised the prospect of a Selangor-like takeover.

Although Ranhill has denied any intention of selling its water business, a source tells FocusM the state government has been mulling a possible takeover for several years.

Sensitive issue

The source says it is a politically sensitive issue. “There has been on and off talk over the past two to three years of the state retaking control of water operations from Ranhill.

“They would not have discussed it at the state level without getting the green light from the higher-ups. But there have been no formal discussions between the relevant parties as yet.

“Demand for water in Johor has increased tremendously in the last decade, with mega projects such as Iskandar Malaysia, Petronas’ Refinery and Petrochemical Integrated Development in Pengerang, and Country Garden’s Forest City putting tremendous pressure on water supply,” he says.

The source also noted that other major water players had previously eyed the lucrative Ranhill-held water concession.

The matter was raised again recently when Johor state public works, rural and regional development committee chairman Datuk Hasni Mohamed said the state government would soon be initiating a meeting with Ranhill officials, including its president and CEO Tan Sri Hamdan Mohamad, to discuss a potential takeover.

The Johor government plans to discuss with Hamdan on taking over Ranhill’s water business

Hamdan is also Ranhill’s largest shareholder with more than 33% stake in the company (4.54% direct and 28.98% indirect stake as of Dec 7).

Hasni says among reasons for the move are to regulate the state water tariff, allocate development expenditure on state water assets and resources, and safeguard the public interest.

It was previously reported that Johor has the highest water tariffs in the country.

Ranhill immediately responded with an announcement to Bursa Malaysia on Nov 27, firmly denying it plans to dispose the water business.

Cash cow

Any takeover would be a major setback for Ranhill, which was relisted on the Main Board of Bursa Malaysia in March last year.

SAJ Ranhill is currently 80% owned by Ranhill and 20% by the state government.

Ranhill’s revenue is derived from two core businesses – energy and water. The company runs the water operations in Johor through its subsidiaries Ranhill Water Services and SAJ Holdings.

For FY16 ended Dec 31, revenue from its water business increased by 12% year-on-year to RM1.1 bil. This makes up about 75% of total group revenue.

A market analyst says if the state decides to acquire the water business, it would leave a big hole in Ranhill’s portfolio.

“Losing the company would be a big blow because it is Ranhill’s cash cow. Even if it gets a good price for SAJ Ranhill, it would be difficult for the company to quickly replace it with a business that can generate similar revenues,” says the analyst.

A point of reference for Ranhill is Puncak Niaga Holdings Bhd. The latter sold its water assets, Syarikat Bekalan Air Selangor (Syabas), to the Selangor government two years ago for RM1.5 bil in a state-initiated restructuring exercise.

But the former water concessionaire has since struggled to venture into other sectors.

Its planned expansion into oil & gas and plantations has not worked out too well. And recently, it decided to sue the Selangor government for losses related to the Syabas sale.

SAJ Ranhill is a profitable entity, posting RM137.84 mil in FY16 profit after tax. This was up 82% from the previous year.

Disruptions

However, it has been under fire for various water shortages and pollution incidents in the state.

Johor residents experienced several major water disruptions in the past couple of years due to reasons such as reduced rainfall and high levels of ammonia in one of its main water sources for raw water – Sungai Johor.

The Sultan of Johor has voiced concern over the water problems in the state, and last year he pointed to the privatisation of the water operations under the previous Johor administration as a major issue.

Some say Ranhill has been unfairly criticised for water pollution problems in Johor because managing water catchment areas comes under the purview of the Johor Water Regulation Body.

Ranhill previously acknowledged the state is facing a shortage of water resources. It also pointed to the lack of rainfall that has been persistent since 2012 due to climate change.

SAJ Ranhill runs abstraction, production, and distribution of water in Johor, while the federal government, through Pengurusan Aset Air Bhd (PAAB), manages water assets such as the plants and pipes.

The group has acknowledged that it needs to gradually diversify to other sources of revenue to reduce its dependence on the company.

It is targeting to grow the non-revenue water (NRW) management business and is expecting growth of 20-25% annually with up to RM100 mil revenue per annum.

The federal government is expected to spend about RM13 bil in capital expenditure to reduce NRW in the next decade, with Ranhill eyeing a slice of this pie.

Good NRW record

It says it has done a good job of reducing Johor’s NRW to one of the lowest in the country.

In general, the lower the NRW, the better it is as it means water is being more efficiently distributed. And the facts back Ranhill’s claims.

National Water Services Commission (SPAN) statistics say that last year, Johor recorded the third lowest NRW in the country, with 25.9%. The figure is down from 36% in 2004, and only next to Penang (21.5%), and Melaka (19%).

The company previously claimed that by reducing Johor’s NRW, it has managed to save 11.36% of water production or 146 million litres per day. This translates to savings of RM91.65 mil annually.

Lucrative 30-year water concession

RANHILL Holdings Bhd, via its subsidiary SAJ Ranhill Sdn Bhd, has an exclusive concession from the Johor government to treat, supply and distribute water to Johor consumers for 30 years from March 1, 2000.

However, the licence to operate is issued by the Ministry of Energy, Green Technology and Water and is renewable every three years.

The licence enables the company to complete the cycle of potable water supply services from the sourcing of raw water, its treatment and delivery to consumers, and the management and maintenance of water supply.

Its operations in Johor include 638 reservoirs, 44 treatment plants with a combined 1,986 million litres per day capacity, 21,642km of pipelines, and 1.1 million connections serving over 3.9 million residents.

Other than its domestic water business, Ranhill also has overseas contracts in cities such as Riyadh (Saudi Arabia), Kathmandu (Nepal), Surabaya (Indonesia), and Mysore (India) besides other water operator partnership programmes in the region.

It currently has non-revenue water contracts in Johor, Kelantan, Pahang and Perak.

On Nov 20, Ranhill announced an agreement for the proposed acquisition of a 100% stake in Australian Northern Power Group for A$3.2 mil.

The company owns 100% of Northern Power Opco Pty Ltd, which is undertaking the proposed development of a 60MW gas-fired power generating station in Australia’s northern territory.